4 Big Mistakes That Will Devastate Your Finances
May 1st 2012 10:02AM
Updated May 1st 2012 4:22PM
Coming up with the perfect investing strategy can take a lifetime of effort and discipline. Unfortunately, all that hard work can go down the drain with just a few lapses in judgment.
That's why it's essential to make sure you not only have an overall investing plan to follow but also include rules that help you stick with that plan through thick and thin. That way, it'll be easier for you to avoid making the common mistakes that can turn a successful, secure retirement into a financial nightmare.
Young adults face more challenges than ever . With student loans imposing a larger burden on graduates' finances than ever before and good jobs hard to come by, just digging your way out of debt is a tough assignment -- let alone starting to save.
But by making an effort to put at least some money aside for long-term financial goals, you put time on your side. Consider: Every dollar you set aside at age 25 will give you twice the nest egg in retirement as a dollar saved at age 35, assuming a 7% annual return. Invest smarter, and it'll make an even bigger difference. So do whatever you can to get started early and not procrastinate.
Mistake 2: Blowing your best chances.
Savers are reluctant to put money into IRAs and 401(k) retirement accounts because they don't like locking their money up. But the tax savings from these accounts can make a huge difference -- especially for late starters.
Catch-up provisions for those age 50 or older let you save $5,500 more in a 401(k) and $1,000 more in an IRA, letting you set aside as much as $28,500 in tax-favored retirement accounts in the years immediately before your retirement. That's a great way to make the most of your top-earning years while not giving up all of your savings to Uncle Sam and the IRS.
Mistake 3: Dumping stocks on dips.
Once you have investment gains, kneejerk responses are hard to avoid. But they're often exactly the wrong move.
Back in 2008, I made a big mistake by selling shares of Starbucks (NAS: SBUX) to harvest tax losses. I convinced myself that in a new era of austerity, the days of the $4 latte were numbered. Trends like Green Mountain's (NAS: GMCR) single-serve coffee and McDonald's (NYS: MCD) bargain-priced cafe drinks seemed like obvious winners in a more budget-conscious world, and I assumed their success would come at Starbucks' expense. Yet even though Green Mountain and McDonald's did indeed thrive, plenty of people kept spending their money at Starbucks -- and the stock rose sixfold as a result.
Every day, the stock market gives you chances to leap before you look. Occasionally, your emotional response will turn out to be right -- but often, you'll regret that gut-driven move in the long run.
Mistake 4: Riding your losers
Related to the last point, it's always tempting to try to hold on to a losing stock in the hopes that it will rebound. But if a stock keeps grinding lower day after day, month after month, it can crush your spirit and eventually leave you wanting to sell at any cost. In those cases, you're better off getting out early.
Chesapeake Energy (NYS: CHK) provides a couple of useful points. Many have argued that natural gas prices can't drop forever -- yet even at decade lows, there's more room for further declines if the supply-and-demand imbalance continues. That has hurt Chesapeake, both operationally and through the ongoing financial problems of CEO Aubrey McClendon, whose interests in Chesapeake wells have now raised new concerns about conflicts of interest in the executive suite. At this point, even if natural gas bounces back, you might profit more from lower-cost producer Ultra Petroleum (NYS: UPL) than with controversy-ridden Chesapeake.
Learn from your mistakes
No matter how hard you try, you won't always avoid mistakes. The key, though, is to recognize when you've made a mistake and to minimize its impact on your portfolio. If you can do that, you'll have come a long way toward creating the perfect investing strategy.
The Motley Fool's special report on long-term investing has some additional pointers on building the strategy that's right for you. It also reveals three promising stock names that could fit well in your portfolio. Getting access couldn't be easier: Just click here to get your free report today!
At the time this article was published Fool contributor Dan Caplinger has made his share of mistakes. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Starbucks and Ultra Petroleum. Motley Fool newsletter services have recommended buying shares of McDonald's, Ultra Petroleum, Green Mountain Coffee Roasters, Chesapeake Energy, and Starbucks, as well as writing covered calls on Starbucks and creating a lurking gator position in Green Mountain Coffee Roasters. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy is never a mistake.
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